Dell's Still Stuck in The Doldrums

NEW YORK ( TheStreet) -- Dell's ( DELL) fiscal second-quarter came in light of expectations, but its third-quarter guidance has left investors wondering if the PC business will ever turn around.

As PC sales continue to be pressured by tablets, smartphones and mobile devices, Dell said it expects third-quarter revenue to fall between 2% and 5% sequentially. It also lowered full-year earnings guidance to at least $1.70 per share. Analysts surveyed by Thomson Reuters were looking for earnings of $1.90 a share.

Deutsche Bank analyst Chris Whitmore is concerned that the pent up demand for Microsoft's ( MSFT) Windows 8 will not be enough to stabilize the PC results. "Although the Win 8 launch should drive some inventory restocking and pent-up demand into the holidays, we remain concerned that Win8 tablets and NBs (notebooks) are unlikely to catalyze a sustained PC demand cycle," Whitmore wrote in a research note. He rates Dell "buy" with a $16 price target.

Results, however, were not all bad with several units of the Round Rock, Texas-based company showing growth, most notably server and networking, which saw revenue growth of 14%. Calling this growth "robust," Brean Murray analyst Ananda Baruah took some comfort that this segment can offset some of the pressures in the PC market.

"It is evident, that as companies pull back on discretionary PC purchases, they continue to invest in the data center, and we believe the strength in the ESS Enterprise Solutions and Services segment can continue to offset some of the downward pressure emanating from the PC market," Baruah wrote in a research note. He rates Dell shares "buy," but lowered his price target from $15 to $14 following the results.

In the fiscal second-quarter, Dell earned 50 cents a share on $14.48 billion in revenue. Analysts polled by Thomson Reuters were looking for 45 cents a share on $14.64 billion in revenue.

Credit Suisse analyst Kulbinder Garcha noted that two of Dell's higher margin contributors, servers and Dell storage, are posting slower growth, and require investment as they become more important to the company. Servers and storage already account for 16% of Dell's sales.

Clearly, the PC market is in trouble. Dell is transitioning itself from being a PC-focused firm to a services company, but that shift is rocky, as evidenced by its second-quarter revenue and earnings shortfall. That transition appears to be taking much longer than many expected, and has some pausing for concern. Sterne Agee analyst Shaw Wu was succinct in summing up the issues at Dell. "Bottom line is that the transformation beyond PCs is tougher and taking much longer than the bulls expected."

Interested in more on Dell? See TheStreet Ratings' report card for this stock.

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-- Written by Chris Ciaccia in New York

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